A year after the ‘Black Swan’ memo
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A year after the ‘Black Swan’ memo

Protocol Pipeline

Hello and welcome to Pipeline! It's been one year working from the home newsroom/office. Hope you're coping! This week: Sequoia's warning one year later, the cloud is on fire and Coupang and Roblox listings.


  • So much for "MBAs can't build startups." Coupang, Grab, Gojek, Oscar Health and Stitchfix have done pretty well, Romeen Sheth notes.
  • This does not scale? "We're living through a giant experimentation in scaling venture capital as an asset class: hundreds of new companies per YC class, big funds like Tiger doing a big deal a minute, tons of IPOs and SPACs. Both awesome and scary at the same time," according to Matt Turck.
  • Founder health care. "Most people think raising VC funding is the barrier to starting a company. The actual barrier is more often health care. Every week it seems I meet another incredible would-be founder, who are instead stuck in a job simply due to [health] insurance for them or their family," writes Michael Grinich.
  • Whose IPO money on the table? According to Matt Levine, "Venture capitalists are not happy when mutual funds get underpriced stock: It dilutes existing shareholders and 'leaves money on the table.' [VCs] are of course perfectly happy when venture capitalists get underpriced stock; that's the business they are in."

The Big Story

VC one year later

A year ago, Sequoia Capital published its Black Swan memo. TL;DR: There will be pain and it could last a long time — several quarters. That feels like a decade or several decades ago. (My last day in an office was Thursday, March 5, 2020, when I decided I needed to go in for an eye doctor's appointment anyway. I rode maskless on the train and bus that day.)

As we look forward to hopefully better times ahead, how far has the industry come since a year ago?

Sequoia's memo certainly put the industry on notice, if it wasn't already. There followed a period of uncertainty when it was unclear if the industry would suffer a downturn for months or even years.

  • Sequoia suggested startups "question every assumption" about their business — and many startups had layoffs and some shut down in the downturn.
  • Some limited partners were quietly making inquiries of their GPs to slow down capital calls and contemplating worst-case scenarios.

Many venture firms, like other white-collar professional industries, shifted to work from home — though for some this meant Wyoming, Miami or Taiwan — while trying to help their startups that were navigating the pandemic. And, of course, many people in the industry had family members and friends who died or otherwise suffered during the pandemic.

But the market unexpectedly roared quickly back. It turned into a frenzy to invest in hot startups.

  • An unprecedented windfall occurred for some firms with big-name IPOs, including Snowflake, Airbnb, DoorDash, Palantir and Lemonade.
  • There were also biotech IPOs and windfalls from the public stock holdings of some venture firms.
  • That continued this year with Affirm, Coupang and Roblox all going public.
  • The SPAC craze threw gasoline on the fire, providing liquidity through companies such as Hims & Hers.

And some sectors were especially buoyed by forces unleashed in the pandemic, from distance learning and remote work to telehealth.

"While many have faced painful loss, physical and mental health crises and significant family and work obligations, public and private markets seem to be booming, especially in health and tech," says Deena Shakir, partner at Lux Capital. "Growth investors are facing more competition at higher valuations than ever before, and pre-seed investors have remarked that they are meeting founders of higher quality and in higher quantity than ever before."

So what's changed? Process-wise and investing-wise, the move to remote work has meant that VCs can take Zoom meetings with founders from anywhere. Some VCs have done deals without meeting a founder in person at all.

  • That has opened up deals and opportunities for startups from around the country and the globe.
  • While some firms, such as Accel, Sequoia, and Y Combinator, had already been active overseas, going global has become more of a standard for VC firms.

This is probably the biggest positive change to come out of the pandemic. For startups, this is generally a good thing, as it opens up many more opportunities. No longer is it standard for VCs to only invest in startups they can drive to from Menlo Park. Startups no longer have to move to Silicon Valley (though many may still do so). And they no longer have to fly in to meet a VC, as many had to before, as Mercedes Bent notes below.

"While remote work is not without its disadvantages, it has also reduced barriers to entry for founders in different geographies and forced behavior change in investors who may have previously preferred to deploy capital within a certain proximity of Silicon Valley," Shakir says.

On a macro level, the venture industry seems to have emerged just as strong if not stronger than before the pandemic. With the blowout results from large tech companies and some emerging startups, tech's role in the economy is just as important — if not more so — than before.

Until there's a market crash — and despite the government printing money as never before — low interest rates should keep capital flowing into public and private tech markets. That means that even average venture funds can proceed investing as before. If and when there is a crash, of course, capital could quickly dry up, especially for non name-brand venture firms.

  • That doesn't mean there isn't scrutiny on tech more broadly in terms of antitrust, privacy, misinformation or other issues.
  • But venture firms still have capital begging to get into funds.

On the diversity front, things have not improved much, though some firms have taken steps in the right direction. For example, Bessemer Venture Partners, Industry Ventures and others are working with Diversio, a firm that provides assessment and certification for diversity and inclusion. But overall, it seems like most venture firms have been preoccupied with first helping their existing startups once the pandemic hit, then scrambling to invest in the next hot startups once the market came back. Diversity and inclusion, as usual, seems to take the back seat.

It remains to be seen whether the pandemic will spur bigger future shifts in investing into areas of need such as health or climate. But VCs follow returns, and the pandemic has shown that some areas like enterprise remain big winners as others that came more into focus — such as biotech — this past year may drive further interest in the future.



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Inside Track

  • Coupang, one of the two big IPOs this week, is growing its market share in South Korea, and its dollar retention rates exceed even Amazon, Walmart and Alibaba, Goodwater Capital writes in its Coupang teardown.
  • Roblox, the other one, was founded in 2004 and grew to its massive outcome by focusing on developers and creating a world that "mirrored the physics of the real world," Greylock's David Sze and Seth Rosenberg write.
  • Helping to eliminate racism requires active moves not just passive support, writes Brad Feld.
  • The cloud is on fire, no surprise there, but how hot? Bessemer breaks it down in its annual State of the Cloud report, with predictions for 2021.
  • How to grow your startup, from PR to sales and marketing, according to Garry Tan.

Need to Know

  • Two IPOs. One quiet firm, Altos Ventures, was an investor in both Roblox and Coupang. It held 21.3% of Roblox voting power prior to the IPO, worth $7 billion+ after first investing in 2008, and less than 5% of Coupang shares, according to the S-1.
  • Cash rules everything. February venture funding continued at a blistering pace, and rounds of $100 million or more continued to represent an increasing portion of funding, according to Crunchbase.
  • How to turn a podcast into a $4 million rolling fund. Entrepreneur Shaan Puri did it without knowing any of his LPs.
  • College dorm or "creator house"? Sorry but I have to include TikTok videos to boost our engagement among our younger demographic.
  • From Protocol: Steve Case says the pandemic has accelerated the Silicon Valley exodus — and that's fine.
  • Also on Protocol: Here's how the company behind CryptoKitties is poised to hit the mainstream with NBA Top Shot.
  • This week in VC history: One year ago, Sequoia Capital published what at the time was a jarring memo: "Coronavirus: The Black Swan of 2020." "It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing."
  • Your weekend reading: The web must work better for young people, writes Sir Tim Berners-Lee, on the web's 32nd birthday.

Five Questions With...

Lightspeed's Mercedes Bent

Mercedes Bent is a partner at Lightspeed Venture Partners, which last year raised $4 billion across three new funds. She previously was an investor at Owl Ventures and has worked in finance roles at Goldman Sachs and the Federal Reserve. She focuses on investments in edtech, future of work, fintech and consumer and has invested in companies such as Stori, Outschool, Forage and United Dwelling.

What's your favorite pandemic meal?

I picked up using a sous vide [machine] in the pandemic, and it really changed my life. I can't believe how much easier it is to cook now. I can just assembly-line a bunch of meats and vegetables and add seasoning and vacuum seal them. You can have a restaurant-quality meal with so little effort

What is the biggest issue that your partners are thinking/talking about at your Monday partner meeting?

One thing I've been discussing especially is retail investing and the zeitgeist we've been going through with GameStop and Robinhood. I really think the consumerization of investing is happening now. And people are drawn to investing for so many reasons. Savings rates are high and interest rates not as high. People are looking for better returns for their money. The social phenomenon for investing feels like it can be a part of something big.

What's one way you changed working in 2020 that you plan to keep going forward?

Taking first meetings on phone or Zoom. Before, I used to do a lot of first meetings in person. It's a bit inefficient. Sometimes you have to fly across the country to do that. But you don't even know if you'll like the company or not. So it can be a waste of everyone's time. When we go back. I think I'll only do in person meetings for the second or third meeting when I know there's interest to go further on.

What problem do you want to see a startup solve?

Edtech. You have so much content out there: Netflix, Wikipedia — there's a lot of stuff you can really learn from. But there's nothing you can layer on top of that and connect with all the people watching or reading to connect for learning purposes. There's things for being social and having a Netflix party with a [browser] extension to watch with friends. But what about for schools and actually teaching and learning?

What company or startup sector is the most underrated right now?

I think what could be the most underrated and surprising story in the next year or two is the AR industry. I feel like I used to look at VR and XR back in 2016 there was a trough of disillusionment. The industry didn't live up to expectations. But it could change in the next year or two.

The other thing — that's not a sector — is women received just 2% of venture funding and Black and Latinx and indigenous/Native people also received little funding. To me that's consistently underrated. We know they outperform the market.

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